The Government may be asked for an urgent change to gambling laws after Internal Affairs lost a landmark High Court decision which ruled it had been illegally punishing pokie trusts for years.

And Internal Affairs' decision to appeal the ruling has fractured relations between the department and Pub Charity, the country's oldest pokie trust, which will leapfrog senior officials and appeal directly to Internal Affairs chief executive Colin McDonald to drop an appeal it says is baseless and will waste public funds.

Pub Charity chief executive Martin Cheer said the relationship "has now degenerated to the level it is dysfunctional".

Internal Affairs appealed last Friday afternoon, just before the time limit expired, against the judgment which prevents it forcing pub pokie machines to be switched off as punishment for bad behaviour by trusts.

It leaves Internal Affairs all but toothless in policing the gaming sector, which has been tainted by controversy for years over pokie frauds.

But a press statement by the department angered Cheer, who said it had deliberately misinterpreted the situation because it did not note that it could still switch machines off if trusts were caught in the act.

The original judgment, last November, related to an incident in 2009 where Pub Charity was found to have overpaid publicans' expenses by $285,000 and was told to switch off their machines nationwide for one day in punishment. Pub Charity had already repaid most of the money, lost due to turnover forecasts not being met during the recession.

Pub Charity appealed, first to the Gambling Commission, then the Wellington High Court - where Justices Brian Collins and Alan McKenzie found Internal Affairs had misunderstood the Gaming Act and had no legal power to order switch-offs for past offences - a tactic long used by the department to punish trusts which overpaid expenses or were caught in questionable deals over community grants.

Internal Affairs gambling compliance director Debbie Despard said switch-offs had been a "useful tool" in ensuring the maximum amount of money went back to the community in grants. Now its only option was to cancel pokie trusts' licences, a rarely used last resort.

Despard conceded the ruling made the department's job more difficult. She would not comment on Internal Affairs' approach to minister Chris Tremain to ask for amendments to the Gaming Act.

Cheer said Pub Charity had been singled out by Internal Affairs because of its public criticism of the department. "We get special treatment because we aren't afraid to point out their errors," he said. And he said any appeal was mere face-saving. "This is about a department that doesn't learn and doesn't want to learn," he said.

The stoush between Internal Affairs and Pub Charity may worsen, with Cheer saying: "There are other matters in the pipeline that reflect [our] concerns . . . about gross errors of judgment displayed by a passing parade of bureaucrats."